The citizens of India cannot shy away from paying taxes. The Government of India imposes two types of taxes on its citizens – direct and indirect taxes. Before we delve into the details of differences between the two taxes, let’s quickly recap the two types of taxes:
Direct taxes: These taxes have to be paid directly to the government and cannot be transferred to anyone else. Different acts govern these taxes.
Indirect taxes: These taxes are imposed on all the goods and services, and not on income and profits. It is collected by a retail store or an intermediary from the consumer or one bearing the ultimate burden of the tax.
| Context | Direct Tax | Indirect Tax |
|---|---|---|
| Imposition | Imposed on income or profits | Imposed on goods and services |
| Taxpayer | Individuals, HUFs, firms and companies | End-consumer of the goods and services |
| Applicability | Applicable to the taxpayer alone | Applicable to every stage of the production-distribution chain |
| Tax burden | The burden falls directly on the individual | The burden is shifted to the consumer by the manufacturer or service provider |
| Transferability | Cannot be transferred to anyone else | Can be transferred from one taxpayer to the other |
| Coverage | Confined to an entity or individual taxpayer | Wide coverage because all the members of the society are taxed |
| Administrative cost | Higher administrative costs and many exemptions | Lesser administrative costs because of stable, convenient collections |
| Tax evasion | Possible | Not possible |
| Allocative effects | Have good allocative effects since they put less burden on the collection | Allocative effects not as good as those of direct taxes |
| Inflation | Helps in reducing inflation | Might help in increasing inflation |
| Orientation | Discourage investments, lessen savings | Growth-oriented, encourage savings |
| Mode of progress | Progressive, reduce inequalities | Regressive, enhance inequalities |
| Most common types (in India) | Income, Wealth, Corporate Tax | GST or Goods and Services Tax |
